Personally I use probably no less than 20 different methods (filters) to identify stocks worthy of my capital, and my client’s capital. This is where my bread is buttered, so I will only give a teaser here…. but generally speaking, I never buy cheap stocks, I never invest in a company with negative earnings, I never buy a company with a low ROE, I look for profit margins above 20%, I look at the performance of the economy where the company does its business. I look at and religiously follow numerous technical indicators; I buy at buy points only. I look for solid, in-favor companies with as a large market capitalization as possible. I hardly ever buy a stock trading at less than $15-20 per share. Buy quality, hold quality, and you will begin to notice that over time the market will reward you for doing so. When you employ an active approach, you need to be sure the companies you trade are in high demand and trade stronger and more predictably then the average stock in the market. Volume is a big deal as well; thinly traded stocks are far less predictable and far more volatile in their moves than those with a more liquid market. They are dangerous, and they invite limit-down mornings into your life. These are not good mornings.
So, given the current environment, you determine a desired allocation and then follow the rules when investing clear capital. (Clear, as in it’s your money – it’s clear of tax liabilities and it’s no longer sitting dead in a stagnant or losing position.) Let’s talk about an investing basic – commodities.
Gold is a store of value for investors when they get scared. It is a precious metal with limited supply and high acquisition (mining) costs. It is currently trading near all-time highs, and while we may see pull-backs as some money gradually shifts out of gold (the rich man’s sideline alternative to the depreciating US dollar, euro, yen, etc…) and back into risk assets such as stocks, it is never a bad thing to have an interest in gold. Gold is one of the few assets you can and should hold for the very long-term. Silver has a similar role, but is currently in the hands of some very aggressive money. Expect quicker moves both up and down in silver relative to the movements of gold. Also, the price of copper is a wonderful gauge of (or a play off of…) global growth expectations. Copper is an industrial metal, in high demand as developing economies build out their infrastructure.
Commodities should represent a significant position (15-40%) of the aggressive growth-oriented securities portfolio, because whether we’re talking about gold, grains or oil, prices around the world are currently going up. Other very large countries are growing and developing at the pace we did during our industrial revolution, and their people need to eat. And when the roads are built, they’ll need to put gas in their cars to get to that job they took from us.
RM ~Feb 2011